In recent months proposals have been made for the introduction of
competition into the system of allocation of IP addresses. In
particular, calls have made for new IP address registries to be
established which would compete with the existing Regional Internet
address Registries (RIRs). Specific proposals have been made by
Houlin Zhao of the ITU-T and by Milton Mueller of the Internet
Governance Project, both of which propose that the ITU itself could
establish such a registry group, operating as a collection of
national registries.

At the time of writing this article both these documents represent
current proposals that have been published as part of the broader
program of work associated with Phase II of the World Summit on the
Information Society.

It would appear that part of the rationale for these proposals lies
in the expectation that the introduction of competition will
naturally lead to outcomes of "better" or "more efficient" services
the address distribution function. This article is a commentary on
this expectation, looking at the relationship between a competitive
supply framework and the role of address distribution, and offering
some perspective on the potential outcomes that may be associated
with such a scenario for IP addresses, or indeed for network
addresses in general.

The Invisible Hand

"...every individual necessarily labors to render the annual
revenue of the society as great as he can. He generally,
indeed, neither intends to promote the public interest, nor
knows how much he is promoting it. By preferring the support
of domestic to that of foreign industry, he intends only his
own security; and by directing that industry in such a
manner as its produce may be of the greatest value, he
intends only his own gain, and he is in this, as in many
other cases, led by an invisible hand to promote an end
which was no part of his intention. Nor is it always the
worse for the society that it was no part of it. By pursuing
his own interest he frequently promotes that of the society
more effectually than when he really intends to promote it."

["An Inquiry into the Nature and Causes of the Wealth of
Nations", Adam Smith, 1776]

These days the expression of the "invisible hand" is often
associated with open markets, where an outcome of the matching
of demands of suppliers and the capability of producers is
achieved through the operation market forces as expressed
through pricing signals. An excess of demand creates
competitive interest between consumers, who are willing to pay
a scarcity premium in order to obtain the commodity, which in
turn lifts production revenues well above production costs and
incents other entrepreneurs to enter the market to satisfy
this unmet demand. An excess of supply forces providers into
competition for consumers, and prices are reduced. This price
drop, in turn, exposes more consumers into the market and
demand levels lift. The equilibrium point of this market
dynamic is where production volume equals demand levels and
the market price for the commodity settles at the marginal
cost of production as set by the most efficient
provider. There are no explicit agreements between the various
actors in the market, nor any form of orchestration of
deliberate coordination of activity. Each actor, whether they
are a consumer of a producer, does not intentionally strive to
achieve this state of equilibration at a point of maximal
efficiency, nor are they even aware of any such common
intention. For this reason the market forces at work were
termed "invisible".

Adam Smith assumed that actors strive to maximize
self-interest, so that consumers choose for the lowest price
that can meet their demands, and that entrepreneurs choose for
the highest rate of profit. He asserted that by making their
excess or insufficient demand known through market prices,
consumers effectively directed entrepreneurs' investment
attention to the most profitable industry. This was the
industry producing the goods most highly valued by consumers,
so that economic well-being was increased thereby. He asserted
that a compelling attribute of a market-based economy was that
it forced each player to think about what other players want
and value, and strive for the most efficient means of meeting
those desires.

The implicit goal with these proposals for competition in the
address distribution function appears to be that such measures are
intended to provide the Internet Service Provider with more
efficient or easier access to larger quantities of address space,
and the consumer with a more efficient, capable and presumably
cheaper Internet service. There are two assumptions being made in
these proposals that need to be examined: firstly that "better
service" as a result of such measures is objectively defined and
desired by all stakeholders; and secondly that apparent barriers to
access to the efficient operation of address distribution in the
existing RIR system (i.e. "bad service" according to the first
assumption) are a result of structural inefficiencies that only the
discipline of competitive supply channels will rectify.

Under the current RIR system, access to address space is governed by
policies which must necessarily pose a barrier to unfettered or
unconstrained resource distribution. Internet resource management is
not a 'free-for-all' without any form of constraint. The policies
that constrain resource allocations are intended to ensure that the
resources are readily available now, and in an anticipated future,
to meet demonstrated needs, and the policies also describe how that
"demonstrated need" is to be documented and assessed.

To determine whether a claimed need for address space is genuine is
a non-trivial exercise, necessarily involving the collection of
detailed information from an applicant, and the technical analysis
of that information. This analytical activity is the primary
challenge of the Internet address registry in performing its
function, particularly when the policies under which it is performed
are subject to constant change, and when consistency of analysis
(corresponding to a fair and objective approach) is to be maintained
as an overall objective of the system. By contrast, the actual
selection and registration of a specific address block for an
approved allocation is secondary, and a relatively mechanical and
trivial component of the process.

The explicit goal of the RIR system is to support an address
distribution system of a finite pool of addresses that is objective,
fair and equitable, while avoiding some of the pitfalls associated
with various forms of excessive wastage of addresses and the
possibility of hoarding of address space by those who would profit
later when scarcity drives the address value up. To determine
whether a claimed need is genuine (or is "demonstrated") is a
non-trivial exercise, necessarily involving the collection and
analysis of information received from the applicant, and the
application of a set of evaluation criteria in a uniform manner such
that the same set of evaluation constraints are applied to the
address distribution function in every individual case. These
constraints are expressed as policies, which in turn are generated
by industry players and related stakeholders, so that the
constraints are the expression of common objectives. This is by no
means a unique arrangement, and this structure is a very typical
example of industry self-regulation as seen in many other activity
sectors.

Is this address distribution function one that could benefit from
the introduction of competitive suppliers?

In general terms this is an instance of a very common area of study
of markets of suppliers and consumers. Competition in markets for
undifferentiated commodities cannot be based on differentiation of
the goods themselves precisely because they are undifferentiated
commodities. This is certainly the case in address distribution, as
one address value is undistinguishable from any other. Nor can the
competition be based on efficiency of production processes and the
resultant marginal cost of production of the commodity, given that
the good is not the outcome of any production process. The only
other attribute where competitive differentiation is possible within
this type of market is that of competitive differentiation of the
constraining policies themselves. In other words the competitive
differentiation is expressed in terms of policy shopping, where a
consumer transacts with a particular supplier on the basis that the
supplier will accede to the consumer's request. Here the competitive
impetus is that a supplier is incented to dilute the constraints in
order to gain a larger customer base, leading initially to
accelerated consumption end decreased efficiency of usage, and
ultimately to the removal of all constraint , resulting inevitably
in premature exhaustion.

Applying this economic perspective to the distribution of Internet
addresses, it is clear that if competitive supply systems were
introduced to address space management, the basis of that
competition would be in terms of policy differentiation, or, in
other words competition in the relative ease of access to address
space.

It appears likely that the initial outcome of such a competitive
supply structure would be the introduction of differences in the
form of constraints applied by the competing address suppliers. What
we would probably see is policy divergence within competing
management systems. By contrast, at present we have one single
globally cohesive Internet, which results not only from the ubiquity
of the Internet Protocol, but also from the consistency of the
policies under which various Internet resources are managed. The
global consistency of address management policies and specifically
of the associated aspect of the use of addresses in the context of a
functioning global Internet routing system is a necessary and vital
part of the cohesive bonds that link together thousands of
individual networks into a single global Internet.

It seems intuitive that differentiation of address policy in a
competitive environment would not naturally result in an increase in
the level of constraint placed on the address distribution
function. Indeed the opposite is the more probable case, where the
outcome of such competitive address distribution systems would be
the progressive relaxation of associated policies and procedures,
and a continuing acceleration in address space allocation rates,
leading to early exhaustion of the entire address pool, even one as
large at the IPv6 address space. This outcome would appear to
compromise the fundamental goals of responsible stewardship of a
finite common public resource.

The five Regional Internet Registries cooperate closely to ensure
consistency of policies that are developed in their regions. Other
competitors would not necessarily do so, nor would they be strongly
motivated to do so under a competitive discipline. A necessary
characteristic of these competitive supply proposals is that
suppliers (in the case of the ITU-T proposal these would be
exclusive national monopoly suppliers) should be able to manage
address space in a relatively autonomous fashion, which implies not
one additional address management system, but up to 200 or so such
national entities. Close coordination among these various regimes
would be difficult or even impossible, even if such an arrangement
were to be fully and genuinely intended by all participants if open
competition is the intended framework. It is also clear that
competition would not be constrained to that competition between
each national supply system and the relevant regional registry. As
we have seen in the Domain Name business the market would likely
open out across national systems. In the same way that country-based
top level domains such as ".tv" or ".nu" are marketed globally, IP
address supply from national registries would naturally follow the
same path if there is a business advantage to expand the scope of
each individual national registry enterprise. There is no natural
constraint that individual IP addresses have to remain firmly rooted
in any particular national environment, nor any natural imposition
that such national address registries are constrained to offer
services only to their national community, particularly if
competition in an open market is the desired outcome. This is then
not a duopoly of supply within any national regime between the
national address registry and the associated regional address
registry, but one of intense competitive pressure bought about by
hundreds of actors, where the competitive pressure is ultimately
expressed as the removal of any form of constraint in making address
allocations. The term "headlong stampede to resource exhaustion," or
perhaps more often termed a "race to the bottom" comes to mind to
describe the consequences of such an environment.

The results of divergent address management policies would have
global impact, for instance in terms of the size or stability of
global routing tables, which could certainly threaten global
Internet stability and routability. The irony of this form of
outcome is that routing table effects would heavily impact smaller
ISPs and particularly those in developing nations, which are less
likely to have the latest high capacity hardware and related routing
capacity, and it is this same community who are said to be in the
greatest need of this form of enhanced access to IP addresses.

But it's also possible that the outcomes of such a competitive
supply framework could be even more perverse in their distortion of
the role of addresses themselves. In a completely unregulated market
there are few forms of imposition of binding regulatory
control. Such markets are often subject to pressures of hoarding,
speculation, and attempts to monopolize supply, to name a few
potential market aberrations. In such scenarios there is the
distinct risk that IP addresses will become akin to property, and be
openly traded like any other form of asset. The problem is that in
so doing addresses may lose their close relationship with the
underlying network, and the addresses could be withheld from the
network in order to be played on the market rather then be used to
support the communication function in order to maximize the
exploitable value of the address. What effectively prevents this
form of outcome today within the RIR framework is the continual
controlled availability of 'new' addresses to meet growing demand at
a level of constraint that is directed at ensuring stable
equilibration of demand and supply. The ultimate beneficiary of the
entire system is the end user of the communications
network. Addresses are readily available to meet service provider
requirements, in order to meet end user needs.

If this is a natural outcome of multiple providers in a commodity
market, why have we not seen such outcomes of market distortions
from the existing RIR system, where there are 5 separate entities
performing this supply function? While the RIRs are regarded as
service organizations, the goal of the RIR system is not to remove
all forms of supply constraint on the availability of access to IP
address space at the expense of the viability of the network
itself. Within the constraints imposed by address management
policies, the RIRs have the common objective of ensuring that
service quality is maximized and the operators of networks have
access to addresses to support their deployment of network
infrastructure. Indeed as membership based organizations, RIRs are
subject to the scrutiny of their members, industry players and wider
community of stakeholders, through regular open policy meetings and
associated processes. This self-control structure ensures that the
constraints applied at any time are an expression of the common
desire for a fair and transparent set of constraints that foster an
efficient and effective communications network. This is indeed the
manner in which self-regulatory frameworks are intended to operate,
in ensuring that through effective balancing of a full spectrum of
interests, a common position of responsible constraint works in the
longer term interests of the ultimate funding source of the entire
industry - the end-user of the Internet.

This commentary should not be read as a diatribe against all forms
of competition as a mechanism of market control. Indeed, one view of
the Internet itself is that it is a very eloquent statement of the
power of competitive frameworks where suppliers are incented to
continually innovate and refine their offering to offer their
customers a superior service in terms of quality and price. Failure
to do so on the part of any single supplier leads to the ascendancy
of competitive suppliers who are capable of performing their service
role in a more efficient and innovative manner. But competition is
not a panacea and there are a large number of situations where
unfettered competition in the supply of a resource can lead to
various destructive outcomes that may completely destroy the value
of the resource itself. This is often seen in aspects of
environmental economics where the balancing factors of an open
market often cannot take into consideration the longer term
interests in conserving the exploitable value of a renewable
resource.

Adam Smith's invisible hand of individual self interest
working to achieve a common beneficial outcome is not
applicable to every form of societal activity.

In feudal English law the "commons" were areas of land that
were held in common by the general population, "the
commoners," as opposed to specific tracts that were held by
the nobility. The grounds may have been pasture lands,
woodlands, or open space used by the general population. The
word "commons" is derived from Latin "communis" and means the
quality of sharing by all or many.

Fourteenth-century Britain was organized as a loosely aligned
collection of villages, each with a common pasture for
villagers to graze horses, cattle, and sheep. Each household
attempted to gain wealth by putting as many animals on the
commons as it could afford. As the village grew in size, more
and more animals were placed on the commons, and the resultant
overgrazing ruined the pasture for all users. No stock could
be supported on the commons thereafter. As a consequence,
village after village collapsed.

In the case of the Internet, addressing lies at the very heart of
the network. Without a framework of stable, unique and ubiquitous
addresses there is no single cohesive network. Without a continuing
stable supply of addresses further growth of the network simply
cannot be sustained. Without absolute confidence in the continuing
stability in this supply chain the communications industry will
inevitably be forced to look elsewhere for a suitable technology
platform for the needs of networked data communications. If the
industry is pushed into such an uncomfortable position of turning
its attention elsewhere simply because the Internet is incapable of
operating its infrastructure in a stable and cost effective manner,
this would be a most unfortunate unintended outcome for the Internet
and its billions of current and future users of this uniquely
valuable common resource.

Paul Wilson,Geoff Huston
April 2005

Disclaimer

The views expressed are the author’s and not those of APNIC, unless APNIC is specifically identified as the author of the communication. APNIC will not be legally responsible in contract, tort or otherwise for any statement made in this publication.

About the Authors

PAUL WILSON is Director General of APNIC. In his capacity, he oversees APNIC's total operations, raising awareness of APNIC's role in allocating and registering Internet resources. He supervises the development of procedures and mechanisms to allocate internet resources to APNIC's members. Paul ensures that APNIC responds to legislative and regulatory issues in the region and that APNIC is represented in key industry bodies.

GEOFF HUSTON B.Sc., M.Sc., has been closely involved with the development of the Internet for many years, particularly within Australia, where he was responsible for the initial build of the Internet within the Australian academic and research sector. He is author of a number of Internet-related books, and has been active in the Internet Engineering Task Force for many years.